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During the month of February, the CC Sage Capital Absolute Return Fund delivered a net return of 2.32%* outperforming its benchmark by 2.32%. The CC Sage Capital Equity Plus Fund delivered a net return of 3.37%*, outperforming its benchmark by 1.23%.
The S&P/ASX 200 Accumulation Index rose 2.14% for the month. February news flow and share price moves are usually dominated by company profit announcements, however this month an added driver was the conflict between Russia and Ukraine. From a bottom-up perspective, companies generally reported healthy results with more beats than misses in earnings versus market expectations, however in many cases cashflows disappointed as companies intentionally built up inventory levels due to concerns of continued supply chain issues. Commentary on inflation and higher costs was a common theme highlighting the importance of pricing power as were share buyback announcements from companies sitting on excess cash. Russia invading the Ukraine drove a large spike in oil and gas prices with investors globally positioned for increased uncertainty.
The strongest performing Sage Groups^ were Gold (+21%) which tends to perform well in times of rising geopolitical risk, Resources (+5%) driven by energy stocks as the oil price rallied a further 11%, and Yield (+3%) as bond yields continued to rise. The weakest Sage Group was Growth (-4%) driven by the de-rating of expensive and unprofitable companies.
In a short space of time the world has moved from dealing with a global pandemic to high inflation and monetary tightening, which is now being accelerated by Russia’s invasion of Ukraine. For the first time in many decades, central banks have to consider supply constraints in their policy formulations. These constraints are apparent across labour markets with many economies reaching full employment, supply chains and commodities. Disruption in Eastern Europe is accelerating inflationary pressures, particularly across the energy complex. This means that policy is likely to be tightened into a slowing growth environment to manage escalating inflationary pressures. This is reminiscent of the stagflation of the 1970’s and increases the risk that we are heading into a secular bear market.
The portfolios are well positioned for this environment with solid exposure across the Resources Sage Group with energy stocks in particular offering a good risk reward outlook. We have become more concerned with the outlook for consumer discretionary stocks and have taken some profits on financials that have done well with the expectation of rate rises. The portfolio is well diversified and positioned to weather the myriad of unknowns. Utilising Sage Groups allows systematic macro risks to be minimised as much as possible whilst benefiting from bottom-up stock selection.
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